2.4 AND 2.5 Flashcards
what is meant by the circular flow of income
it shows how different sectors of the economy link together, e.g. how workers are employed by firms, and there is a wage flow from the firms to the workers, and a flow from the worker to the firm in terms of labour supplied
draw the circular flow of income on a diagram, showing:
- flow of money and real resources between firms and households
- the leakages/withdrawals and injections
- household on bottom - arrow going up to firms on right
- firms on top - arrow going down to household on left
- leakages on left
- injections on right
define the multiplier
when the final increase in spending in an economy is bigger than the original injection that caused it
what is the formula for the multiplier
1 1
_____. or __________
1 - MPC MPW
MPW = MPS + MPT + MPM
define marginal propensity to consume
the proportion of additional income that is spent
define marginal propensity to save
the proportion of additional income that is saved
what is the value of the multiplier when the MPC is 0.9
1/(1-0.9) = 1/0.1 = 10
what happens to the value of the multiplier if the MPS increases?
as the MPS increases the value of the multiplier decreases as less of the additional income will be spent in each round of spending
if the value of the injection is £50 million, and the MPC is 0.8, what is the final increase in real output?
1/(1-0.8) = 5
5 x 50 = £250 million
explain using a diagram the impact of investment on economic growth
in the short run, investment increases AD which means more output. in the long run, an increase in investment increases the quantity of capital, and so increases the productive potential of the economy. shown by a shift to the right of the LRAS curve (full vertical line).
explain using a diagram the impact of innovation or technology improvements on economic growth
innovation/improvement in technology can increase the quality and quantity of capital, and increases the productivity of labour, which therefore increases productive potential and so econ growth increases. LRAS 1 > LRAS 2
explain how migration affects economic growth
with more migrants, there is a bigger labour pool. which means more people can be employed, and more people with income means more people spending in the economy. consumption increases and so economic growth rises. also, more quantity of labour, so productive potential increases
explain how improvements in the education or health service would affect economic growth
improvements in education means improved quality of labour. this can mean when workers are employed productive potential increases and therefore firms increase production, which means more output, so more revenue for the firm, and so higher economic growth
explain how changes in the birth rates would affect economic growth
if the birth rates are high this means that there will have to be more spending in the economy to accustom for this. for example, buying bigger houses, buying toys for children etc. this means more consumption and so economic growth increases. and vice versa.
explain how an increase in exports might affect economic growth
AD will be increased in the short run and this causes economic growth. in the long run, exports increasing may incentivise firms to invest more to satisfy overseas demands, leading to an increase in capital in the economy, and therefore long run econ growth
explain how an instability of government would affect economic growth
if governments are stable/predictable then firms feel more confident about the future, and increased investment leads to increased investment and so there is a rise in economic growth
explain how a credit crunch or reduced access to finance might affect economic growth
investment decreases, so economic growth decreases in both the long and short run.
distinguish between actual and potential economic growth
actual economic growth is the change in GDP over time. potential economic growth measures how much the economy could produce if all factors of production were fully and efficiently employed
give five examples of events that would increase AD or SRAS, and hence increase actual economic growth
- decrease in wages
- increase in business confidence
- decrease in interest rates
- decrease in energy costs
- decrease in VAT
give five examples of events that would increase LRAS and increase potential economic growth
- improvements in education
- increased no. of apprenticeship schemes
- improvement in technology
- increased incentive to work
- decrease in corporation tax that results in an increase in investment
draw a diagram to illustrate the economic cycle
diagram in notes for 2.4/2.5
illustrate the difference between actual and potential economic growth. mark on the diagram a positive and negative output gap
diagram in notes for 2.4/2.5
define a positive output gap
where actual output > potential output
define a negative output gap
where potential output > actual output
